The Biden administration’s monthly child tax credit started arriving in parents’ bank accounts, the first installment of what is intended to be a long-term effort to reduce child poverty in the United States. The direct deposit policy makes it easier for families to access the credit, with no paperwork to file and no work requirements or other bureaucratic hurdles to overcome.
The policy is also designed to encourage spending on children’s necessities, with studies suggesting that labeled money is more likely to be used for the specified purpose. The universal nature of the credit means that nearly nine in ten American families qualify, and its simplicity is in sharp contrast to many safety-net programs, which have traditionally involved complicated procedures and paperwork.
The simplicity of direct deposit — the new credit is $300 per child ages 5 and younger, and $250 per child ages 6-17 — is a major reversal from most safety-net programs, which have work requirements and other hurdles and oblige recipients to navigate a complicated bureaucracy. (People who don’t use direct deposit for their taxes are receiving checks; those who don’t file taxes can sign up for the credit online.)
Also, money labeled for children — the deposit that arrived in parents’ bank accounts Thursday was called CHILD CTC — is more likely to be spent on children, research shows. The previous child tax credit was one of many payments and credits folded into a final tax number each April, so it was easy for taxpayers to lose track of a credit meant for children.
An influential study on a child allowance sent to mothers in Britain in the 1970s found that unlike previous benefits not designated for children, it was more likely to be spent on things like clothing and toys for children. Other studies suggest that when mothers are given money, they are likely to spend it on food and other necessities for their children.
Also, labeling the purpose of the money guides people on how to spend it. Behavioral economist Richard Thaler described in 1985 the ways in which people keep mental accounts, allocating money for different purposes, even though this “violates the economic principle of fungibility” — the idea that money is interchangeable. People tend to use monthly payments for daily expenses and lump sums for long-term investments, such as education or a car, said H. Luke Shaefer, a professor of social work studying anti-poverty policy at the University of Michigan.
Although the new tax credit is a large increase for low earners, higher earners end up receiving the same amount annually that they would have in previous years — with half of it coming earlier in monthly installments. Still, it’s likely to make a difference in what they do with it, researchers said.
“I’m an economist, so I would say money is fungible, and aren’t people funny being tricked by this?” said Diane Whitmore Schanzenbach, who studies child poverty and policy at Northwestern. “But that’s how people work. You sort of have your mental accounts — this is money I spend on food, this is money for the kids.”
A policy goal of the tax credit is to slash child poverty, and direct monthly payments have the biggest impact on the poorest families. The poorest third of children were excluded from the previous child tax credit because their parents didn’t pay income taxes, and even for those who received it, a once-a-year tax refund did not help in an efficient way with daily expenses such as food, child care, and rent.
Since the last major changes to family welfare policy in the 1990s, and especially during the pandemic, there has been a much greater realization that families’ income is rarely stable over time. People across income levels go in and out of financial stability and employment.
“When we load up so much of our aid in an annual big refund, it means so many of our families are going into the red by the end of the year,” Shaefer said. “We used to think about poverty in the United States as static — your income is below the poverty line — but people’s lives are very volatile.”
Politically, the more universal a program is, the more buy-in it has, because the money isn’t benefiting just some people, and there is no stigma attached. Nearly 9 in 10 American families qualify — all but the richest.
Also, automatic monthly payments are a recurring reminder of government support. Both parties became more willing to send unconditional checks during the pandemic, and to seek credit for it. President Donald Trump made sure his name was on stimulus checks, and Biden sent letters to each family receiving the child benefit.
It’s a sharp contrast with President Barack Obama’s 2009 tax cut, in which he decreased the taxes withheld from people’s paychecks so they took home more money — but they didn’t necessarily realize it or give him political credit.
“I think Democrats learned their lesson under Obama,” said Samuel Hammond, director of poverty and welfare policy at the Niskanen Center. “Quietly reducing people’s taxes may be based in theory, but doesn’t win you any political favors. Democrats are very aware that the saliency of this policy will help remind voters that Democratic governments help ordinary people.”
Republican voters, generally proponents of small government, seemed as excited as anyone else to have the credit hit their bank accounts, he said. And Republican lawmakers, with a few exceptions, were mostly quiet about the policy. It reflects a growing split between social conservatives, who are increasingly open to the government financially supporting families, and economic conservatives, who prioritize limiting government spending.
Many of today’s working-class, socially conservative, and religious Republican voters aren’t as concerned about free-market economics, Hammond said. They want strong families and are likelier to favor direct payments that people can spend as they wish, rather than to support policies with more governmental involvement, such as universal child care. Widespread support may also make the child credit, which is only for 2021, harder to reverse from a political perspective.
Helping families is an uncontroversial policy goal, researchers said, but there is less agreement on how to do it. In this case, the government is betting that the simplest answer — appealing to people’s satisfaction with money appearing in their bank accounts — may be the most effective.
The policy provides a direct deposit that enables families to access the credit with no paperwork or work requirements, and its universal nature means that nearly nine in ten American families qualify. The policy’s simplicity is a major reversal from most safety-net programs, which have work requirements and other bureaucratic hurdles, and the labeled money is more likely to be used for the specified purpose. The policy’s goal is to slash child poverty, and direct monthly payments have the biggest impact on the poorest families. Automatic monthly payments are a recurring reminder of government support.
What is the monthly child tax credit introduced by the Biden administration?
The monthly child tax credit is a policy that makes it easier for families to access the credit, with no paperwork to file, no work requirements or bureaucratic hurdles, with the intention of reducing child poverty in the United States.
What is the amount of the new child tax credit?
The new credit is $300 per child ages 5 and younger and $250 per child ages 6-17.
Who is eligible for the child tax credit?
Nearly nine in ten American families qualify, and its simplicity is in sharp contrast to many safety-net programs.
Why is direct deposit preferred over checks?
Direct deposit makes it easier for families to access the credit, with no paperwork to file, and studies show labeled money is more likely to be used for the specified purpose.
What do studies say about how people spend labeled money?
Research shows that money labeled for children is more likely to be spent on children, and labeling the purpose of the money guides people on how to spend it.
What impact does the child tax credit have on higher earners?
Higher earners end up receiving the same amount annually that they would have in previous years, with half of it coming earlier in monthly installments.
What is the policy goal of the child tax credit?
The policy goal of the tax credit is to slash child poverty, and direct monthly payments have the biggest impact on the poorest families.
Why are direct monthly payments preferred over annual refunds?
Annual refunds did not help in an efficient way with daily expenses such as food, child care, and rent. People’s income is rarely stable over time.
What is the political advantage of direct monthly payments?
Automatic monthly payments are a recurring reminder of government support, which will help remind voters that Democratic governments help ordinary people.
Who is in favor of direct payments to families?
Socially conservative and religious Republican voters want strong families and are likelier to favor direct payments that people can spend as they wish.